• Rising to the ranks. We continue to see data centre (DC)-related news flow shaping market sentiment on the back of structural demand, the lower interest rate environment and multi-year investments by hyperscalers. Approvals for DC investments are expected to hit another high in 2024, ahead of the guidelines to be enacted on new builds with the investment pipeline looking strong going into 2025. Our preferred DC stock picks are Telekom Malaysia (TM), Singtel, Tenaga Nasional (TNB), YTL Power (YTLP), Gamuda, Sunway Construction (SCGB), IJM Corp (IJM), Sime Darby Property (SDPR) and Mah Sing.

• More can play the game. The domestic DC landscape has gotten a big shot in the arm with hyperscalers committed to setting up their cloud regions. The multibillion MYR in investments acts as a strong funnel for growth, adding to the investments by wholesale co-location providers. We see the strong commercial proposition of DCs spawning more M&As and/or strategic partnerships across multiple stakeholders, fuelling an expansion in transaction multiples. Agricultural land owners are warming to diversification opportunities in light of declining yields from traditional crops.

• Malaysia is set to emerge as the largest DC hub in the ASEAN region. According to DC Byte, more than 1GW of supply is expected to come on stream over the next two years vs the current installed capacity of under 400MW. About 3GW of capacity is in the developmental stages, and will be added progressively over the next 3-5 years. Potential DC inventory by 2028 would be 10x more than what it took the industry to build over the last two decades. This would put Malaysia ahead of Singapore, Asia’s largest DC metro where capacity is projected to stabilise at 1.4GW due to land scarcity and stricter conditions imposed on new builds.

• AI – the new DC goldmine; risks of supply glut possibly exaggerated. We see accelerated adoption of artificial intelligence (AI) catalysing demand for scalable DC infrastructure. More complex AI models will translate into exponential growth in DC workloads with greater investments in Graphics Processing Units (GPUs) to handle and process the enormous datasets to train AI models. The prolific cycle of investments should downplay growing concerns over an inventory oversupply, in our view. The risks of a supply glut should also be mitigated by data compliance and residency requirements, modular expansion undertaken by DC owners and the need for older facilities to be retrofitted to meet current needs.

• Moving up the economic value chain. A 2022 study by Oxford Economics (OE) revealed that over 20,000 jobs were created in Europe by Google’s investments in DCs. More than 60% of jobs relate to capital investments and are staggered across sectors. We see DC investments as a catalytic enabler to raise Malaysia’s economic complexity and move up the technology ladder. The timely development of the Johor-Singapore Special Economic Zone (JS-SEZ) is a potent stimulus, providing a fecund ground for DCs to thrive.

• The strain on power grids and water are well documented DC risk factors on top of regulatory-typed pitfalls with new guidelines on sustainable DC development addressing longer term concerns on the usage of valuable resources.

Source: RHB Securities Research - 2 Oct 2024